Lines of credit, also known as revolving loans, allow you to borrow money up to a set borrowing limit or credit limit from a financial institution like a bank or credit union. Unlike personal loans where you get a lump sum and pay it back over a fixed term, revolving credit lets you access the money, make minimum monthly payments or pay off the balance in full during the draw period. The interest rates on these credit lines can be variable or fixed and you only pay interest on what you borrow not the entire credit line. Credit scores and credit history play a big role in approval and interest rate. Unsecured credit lines are available but secured lines like home equity lines often have a lower apr. Just remember credit is meant to provide flexibility but must be managed responsibly to avoid financial trouble.
Features
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Financial Institution. Banks, credit unions and other financial institutions offer lines of credit to individuals and businesses.
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Personal Loan vs. Personal Lines. Unlike a personal loan where you get a lump sum, personal lines of credit lets you access a set amount of money as needed.
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Available Credit. This is the amount of credit available to you on your line of credit based on your credit limit and outstanding balance.
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Unsecured Personal Line. Unsecured line of credit is not collateralized. This is different from a secured loan like a home equity line or home equity loan.
Pros and Cons
Pros
Access Money for Major Expenses or Unexpected Costs. A line of credit provides you with a flexible way to borrow money as needed, making it a great option for major expenses or unexpected costs.
Lower Annual Percentage Rate than Credit Cards. Lines of credit, especially secured ones like home equity lines, often have lower annual percentage rates than credit cards, which can save you money on interest paid over time.
Flexible Repayment Schedule. With a line of credit, you can often choose to make minimum payments or pay off your outstanding balance in full, depending on your financial situation.
Cons
Variable Interest Rate. Many lines of credit have variable interest rates, which can increase over time and make your borrowing money more expensive.
Annual Fee. Some financial institutions, such as banks or credit unions, may charge an annual fee for a line of credit, which can add to the overall cost of borrowing.
Risk of Overborrowing. Because a line of credit provides you with easy access to borrow money, there's a risk that you could overborrow and end up in financial trouble. It's important to use credit wisely and only borrow what you can afford to repay.
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How to Apply for a Line of Credit?
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Check Your Credit Report. Before applying for a line of credit, it's a good idea to check your credit report and credit score. This can help you determine whether you're likely to be approved and what interest rate you might be offered.
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Shop Around for the Best Deal. Different financial institutions, such as banks or credit unions, may offer different terms and interest rates on lines of credit. It's a good idea to shop around and compare offers before you apply.
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Gather Your Financial Information. When you apply for a line of credit, you'll typically need to provide information about your income, expenses, and assets. Gathering this information ahead of time can make the application process easier.
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Submit Your Application. Once you've chosen a financial institution and gathered your financial information, you can submit your application. This can typically be done online, over the phone, or in person.
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Wait for Approval. After you've submitted your application, you'll need to wait for approval. The approval process can vary, but it typically involves a credit check and a review of your financial information. If you're approved, you'll typically be able to start accessing money from your line of credit right away.
Requirements and Conditions
Requirements
Credit Check. Most financial institutions will perform a credit check to assess your creditworthiness. A good credit score and credit history can increase your chances of approval and help you secure a lower interest rate.
Income Verification. You'll typically need to provide proof of income to show that you can afford to make the minimum monthly payments on your line of credit.
Minimum Credit Score. Some financial institutions may require a minimum credit score for approval. The required score can vary, so it's a good idea to check with the financial institution before you apply.
Debt-to-Income Ratio. Financial institutions may also consider your debt-to-income ratio, which is a measure of your monthly debt payments compared to your monthly income. A lower ratio can increase your chances of approval.
Collateral. For secured lines of credit, such as home equity lines, you'll typically need to provide collateral, such as your home, to secure the loan. Unsecured lines of credit, on the other hand, do not require collateral.
Conditions
Credit Limit. The amount you can borrow, up to R500,000, is determined by your financial institution based on your creditworthiness, income, and other factors.
Repayment Period. Once the draw period ends, the repayment period begins. During this time, you must repay any outstanding balance on your credit line. The repayment period is revolving.
Interest Rates. Interest rates on revolving loans are personalized and can be variable or fixed and generally go up to 14%.
Ways to Receive the Money
Once your revolving loan, also known as a credit line or personal line, has been approved by the financial institution, the funds will typically be paid straight into your bank account. This allows you to access the money easily and use it for your intended purpose, whether it's for major expenses, unexpected costs, or emergency expenses.
Things to Pay Attention To
Minimum Monthly Payment. Be sure to understand the amount of the minimum monthly payment and when it's due. Failing to make the minimum payment can result in late fees and damage to your credit scores.
Interest Rates and Charges. Revolving loans can come with various interest rates and charges, such as a fixed interest rate, variable interest rate, annual fee, or initiation fee. It's important to understand all the costs associated with your credit line so you can make informed decisions about borrowing money.
Credit Utilization. This is the ratio of your outstanding balance to your credit limit. High credit utilization can negatively impact your credit scores, so it's a good idea to keep your outstanding balance well below your credit limit.
Repayment Terms. Understand the terms of your revolving loan, including the length of the draw period, when the repayment period begins, and the repayment schedule. Some financial institutions may also charge prepayment penalties if you repay your credit line in full before the end of the repayment period.
Borrowing Responsibly. Revolving loans can be a helpful financial tool for managing major expenses, unexpected costs, or emergency expenses. However, it's important to borrow money responsibly and only take on debt that you can comfortably repay.
Reasons for Getting Rejected for a Line of Credit
Poor Credit History or Low Credit Scores. Financial institutions use your credit history and credit scores to assess your creditworthiness. If you have a history of late or missed payments, defaults, or other negative information on your credit report, or if your credit scores are low, you may be denied a credit line.
Insufficient Income or Employment Instability. Financial institutions want to be sure that you have the means to repay the borrowed money. If you have a low income, a high debt-to-income ratio, or a history of employment instability, you may be denied a credit line.
High Credit Utilization. If you have maxed out your credit card account or other lines of credit, or if you have a high outstanding balance relative to your credit limit, you may be denied a new credit line.
Too Many Recent Credit Applications. If you have recently applied for several credit cards, personal loans, or other lines of credit, you may be denied a new credit line. Each credit application can result in a hard inquiry on your credit report, which can temporarily lower your credit scores.
Inaccurate or Incomplete Information on Your Application. If you provide inaccurate or incomplete information on your credit line application, or if the financial institution is unable to verify your information, you may be denied a credit line. Be sure to double-check your application before submitting it and to provide any additional information that the financial institution requests.
How to Repay a Line of Credit?
Make Regular Payments. Make at least the minimum monthly payment on your outstanding balance by the due date to avoid late fees and damage to your credit scores.
Pay More Than the Minimum. If possible, pay more than the minimum monthly payment to reduce your outstanding balance and save on interest charges.
Create a Budget. Create a budget that includes your credit line payments to ensure that you have the funds available to make your payments on time.
Avoid Taking on More Debt. Try to avoid taking on additional debt while you're repaying your credit line. This can help you focus on repaying your outstanding balance and avoid getting into financial trouble.
Consider a Balance Transfer or Consolidation Loan. If you're struggling to repay your credit line, consider transferring the balance to a lower-interest credit card or taking out a consolidation loan to simplify your payments and reduce your interest charges.
